Tag Archives | money

When to Buy New Software

See Also:
How to Choose New Software
How to Choose a Software Dealer
Technology Assessment Criteria
Technology Strategy for Small to Medium Sized Companies
How to Ensure Redundant Data Communications Links

When to Buy New Software?

We hear this question a lot. We usually talk about the symptoms associated with the need for a software purchase and we will here as well. Actually the symptoms all add up to one big diagnosis – you need new software when your cost to continue on your current path exceeds the price of the new software

Wow, that really sounds simplistic. It is. The catch is determining your Cost to Do Nothing. Often owners feel that if they aren’t writing a check, their current methods aren’t costing them money. The reality is that you could easily uncover enough cost savings to pay for your new software.

Cost To Do Nothing

Let’s look at some ways to discover the Cost to Do Nothing:

• From the broad view, look at the infrastructure of your organization. If you are planning to grow, will the infrastructure support the additional stresses that growth requires? How many people will you need to add? Could new software make your current staff productive enough to reduce or eliminate the new staffing needs?

• Circle down a level that look at the amount of daily work that is either entered into your system by hand or is retrieved from your system and manipulated by hand into another form.

• While you’re at this level, check out the work flow from department to department. Are there bottlenecks and disconnects in flow. Each time another person enters the same data adds to the Cost of Doing Nothing.

• Another telling observation is to count the number of spread sheets you have created just to manage the daily work flow. Each spread sheet requires additional time to export, import and manipulate data.

• As your view gets closer ask if the software the single source in your organization or is the information collected from multiple sources. Note how many sources and how long it takes to gather and compile the information.

• At the up close and personal level, talk with each system user. They’re the experts and can tell you what works, what doesn’t, and what they wish the system would do. When the don’t works and wishes exceed the things that work it may be time for new software.

When to Buy New Software Example

So, what do you do with all of this information? Let’s look at a fictitious example for Acme Brick. Here’s how their inventory control ran amok in this case review.

• Acme fills 465 orders/year

• Average order is $14,000

• 50% of the orders are backordered

• 85% of the backorders are canceled by the customer

• 197 orders canceled each year

Value Proposition

For Acme Brick in just this one example the Cost to Do Nothing is significant. Let’s look at the value proposition:

• $2.7 million in canceled orders annually

• Software solution including customizations, installation, training – $300,000

Return on Investment (ROI) in less than 2 months

• First year savings $2.4 million plus $2.7 million for each year thereafter

Alright, that’s an extreme example and Wyle E. Coyote is simply an idiot for letting this type of debacle go on for more than a nanosecond. The point is that just about every business can discover new methods of saving money and time by looking at the Cost to Do Nothing.

Needs Analysis

Right after the Cost to Do Nothing review, the next step is a Needs Analysis. Great! More work. There’s another option here. How about using the Wikiapproach to determine the Cost to Do Nothing and get a Needs Analysis in the bargain?

By now you are probably familiar with the Wiki concept – get other people to do the lion’s share of the work. Most software dealers want to performNeeds Analysis on your business before they recommend software and present a proposal. If they are really worth their salt, they’re going to charge for this analysis because they are delivering a thoughtful, detailed report. The price can range from a nominal fee to a significant charge and everywhere in between.

The point here is that you can get other people to do the work, learn amazing things about how your work flows, and clearly answer the new software question.

Learn how you can be the best wingman with our free How to be a Wingman guide!

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How Factoring Can Make or Save Money

See Also:
What is Factoring Receivables
Accounting for Factored Receivables
Journal Entries for Factored Receivables
Can Factoring Be Better Than a Bank Loan?
History of Factoring
Factoring is Not for My Company
The What, When, and Where About Factoring
Nest Egg

How Factoring Can Make or Save Money

Opportunity for Discounts:

Lack of cash flow frequently causes a business to miss out on discounts offered by suppliers. Not taking advantage of these discount opportunities results in paying a higher cost of goods. Plus, many suppliers will negotiate even higher discounts for a customer who demonstrates the ability to consistently pay in cash within the discount period. Generally the best price is not the published price or terms. Rather, the best price is the negotiated price. This price is based on increased volume and negotiated terms backed by cash or quick pay. So, taking advantage of discounts gives a business the ability to add as much as 2 to 5 percent to its gross profit margin.

Administrative and Clerical Costs:

The clerical and data entry costs used in the physical processing of accounts are additional cost factors. Examples of physical processing include generating and stuffing statements. Depending on the size of the company and relative size of the accounts receivable, this may involve a full time employee, a larger accounting staff, or a current employee handling this responsibility as part of a diverse job description. The labor costs involved come into play on both ends. It includes:

  • The labor involved in generating and sending the statements
  • The administrative duties of receiving and posting account payments

Postage and printing costs add up when companies produce and mail large numbers of multi-colored statements on a regular basis. You must also consider these costs.

Management Resources:

Many overlook management’s time. In addition, many often overlook the missed opportunity of time spent doing something more productive. Reviewing accounts, placing calls to late-paying customers, and generating reports for analysis are all time consuming tasks involved in managing receivables and controlling cash flow.

Missed Opportunity:

Possible growth opportunities missed due to a lack of cash flow should also be taken into account when analyzing receivables management. Adequate cash flow is the single most important factor in achieving and sustaining business growth aside from market opportunity. Most businesses would have an extensive list of opportunities for growth and expansion to pursue if all receivables on the books were paid in cash today. Some examples of what could be accomplished if a company had access to cash instead of carrying customer debt include the following:

  • Bidding on new jobs
  • Investing in new equipment
  • Expanding the sales force

Furthermore, inadequate cash flow is like wearing handcuffs when it comes to growing a business. Improved receivables management, resulting in money in the bank and less or no debt, creates the environment and the attitude to set a goal and achieve the next level of growth and success.

Contributing Cost Factors

Once all contributing cost factors are estimated and totaled on an annualized basis, divide this number by total annual sales to determine a quantifiable cost for managing accounts receivable as a percentage of sales.

Payment Terms

Providing commercial customers with payment terms is a necessary part of doing business and an essential component of building good customer relationships. Performing this type of analysis on a regular basis highlights areas for additional savings and increases efficiency. In addition, knowing the actual cost of managing receivables and controlling cash flow allows for the implementation of more effective management strategies for the business as a whole. There are options available in the marketplace to help improve cash flow and receivables management, such as accounting consultant services, cash flow management systems, and factoring programs. Analyzing the true cost of receivables management is the first step in determining if these options make sense for a business by ultimately improving its bottom line.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

how factoring can make or save money
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Debits and Credits

See Also:
Accounting Asset Definition
Accounting For Factored Receivables
Financial Accounting Standards Board (FASB)
Imprest Account
Accounting Fraud Prevention using QuickBooks
Accounting Income vs. Economic Income

Debits and Credits Definition

Debits and credits, defined as the double recorded method which is the centerpiece of accounting, are used by accountants across the world. The benefit to using debits and credits, is that they provide double redundant record keeping for expenditures; money is both added and subtracted. This creates 2 places for expenses on financial records, thus preventing issues from improper recording.

Debits and Credits Explanation

Debits and credits, explained as the error-proof method for accounting, allow accountants to have twice the recordsDebits and credits basics exist as such: there is a debit and credit account for each of the journal entries. Debit accounts is where money is taken from the company. Whereas credit accounts is where money is added to a business.


Download The Know Your Economics Worksheet


Debits and Credits History

Debits and credits accounts were formally invented in the 15th century by Luca Pacioli, as an official system to specify what was already used by merchants in Venice. These formal roots trace as far back as the Roman empire. There a side for a creditor and a side for a debtor existed. They used this system in the Middle East, Florence, and the Mediici bank. They finally found a home in Venice.

Debits and Credits Rules

In either of these, a debit or credit can occur. If a debit occurs in a debit account, then the company loses money. If a debit occurs in a credit account, then money is taken from a company to be later added to another company credit account. To make the double entry work with this contra accounts were created: accounts which exist merely to balance the effect happening in another account. This is how debits and credits double entry can occur. It may seem confusing to the average person, but accountants love that this method is redundant. It lends to pristine recording, which you can check in multiple places.

Debits and Credits in Bookkeeping

Any respectable accountants uses the double entry bookkeeping method. For example, debits and credits in quickbooks allow the system to make sense to the accountant as well as the untrained record-keeper. Through software like Quickbooks, this method has become readily available and useful for everyone.

Example

For example, Steven is a part time bookkeeper for a small boutique in a strip mall near his house. He shows up to keep records for the company owners, who are too busy with the operations of their business. Quickbooks is Steven’s best friend when he is in the office.

But Steven never understood how credits and debits work. Then, one day, the company accountant visited the office. He was able to pick her brain. The experience was quite enlightening.

The accountant told Steven about how double entry bookkeeping works. By showing t accounts debits and credits examples he finally understood. This eventually proved useful.

One day, Steven overheard the owners express how their financial records had an error. After listening, he was able to look at the records. He took his knowledge of accounting, recently learned, to move an unnamed expense in the software. This corrected the problem, and the owners even gave Steven a bonus.

Understanding credits and debits in accounting has greatly helped Steven. After his experiences, he decided to become an accountant. And he will work closely with these records for the rest of his life.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

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Bankruptcy Information

See Also:

Chapter 7 Bankruptcy
Chapter 11 Bankruptcy
Bankruptcy Code
Chapter 13 Bankruptcy
Bankruptcy Costs
Chapter 12 Bankruptcy
Courts – Bankruptcy

Bankruptcy Information

Bankruptcy is the legal condition of being unable to repay debts. It can apply to individuals or organizations. There are two types of bankruptcy: voluntary and involuntary.

Voluntary bankruptcy occurs when the debtor, the party that owes money, files for bankruptcy. Involuntary bankruptcy occurs when the creditor – the party owed money – files a petition for bankruptcy against the debtor. Voluntary bankruptcy is more common than involuntary bankruptcy.

The idea is to settle the debtor’s debts in an orderly manner that forgives the debt and at least partially repays the creditors. When an entity files for bankruptcy, the creditor values the assets. Then they make arrangements to pay off all or some of the entity’s outstanding debt. After successfully completing the bankruptcy proceedings, the debtor is relieved of its prior debt obligations. This allows them to resume operations.

Bankruptcy laws are stated in the chapters of the Bankruptcy Code. These proceedings take place in Bankruptcy Court.

Bankruptcy Pros & Cons

There are advantages and disadvantages of bankruptcy proceedings. First, filing for bankruptcy allows an entity facing financial distress to settle its debts and essentially start over again. Second, bankruptcy regulations allow creditors to collect at least a portion of what is owed to them. Also, bankruptcy regulations are a sort of safety net, encouraging entrepreneurial individuals and businesses to take risks.

On the other hand, bankruptcy proceedings are expensive for the debtor. An entity filing for bankruptcy may incur legal costs, operational inefficiencies, asset write-downs and liquidation losses, and a higher cost of capital. Also, in bankruptcy proceedings, creditors rarely recoup the full amount owed to them.

Although bankruptcy can be great option for a company with no end in sight, we need to start looking at the valuation aspect. Download the Top 10 Destroyers of Value to maximize the value of your company.

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Financial Jargon

See Also:
Categories of Banks
Finding the Right Lender
Funding Source Versus Lender
How to Manage Your Banking Relationship
Interest Rate
Is it Time to Find a New Bank?

Financial Jargon

My client, Elliott, met a friendly banker at a networking function. The banker told him, “I like your business and would like to loan you and your company money”. Elliott spent time with him because he believed if he got to know him it would be easier to borrow money. But, when the time came for Elliott to borrow the money, the answer he got was no.

Elliott called to tell me he did not get the money and was upset because he thought the banker was his friend. My answer to Elliott was, “he probably is your friend. But, you are not getting what you want from the banker (money) because you are not communicating in his language.”

Elliott got mad during our conversation and said things like banks don’t loan you money unless you really don’t need the money. Then to make matters worse, I told him you, are probably right. He thought just because the banker was his friend and friends help friends in time of need, the money would be his for the having. After we talked a while and he settled down, I told him the problem. Bankers are the individuals who have invaded earth from another planet. They come from the planet known as Financial World. They look and act exactly like the rest of us that inhabit earth with one exception, their language. The language they speak is known as Financial Jargon.

Financial jargon or the language of accounting can make it difficult for the CFO and CEO to work seamlessly together to move the company forward. Learn the language of business in our CFO coaching workshop – the Financial Leadership Workshop.

Learn More About Our Coaching Program

What is this Language of Financial Jargon?

Elliott asked, “What is this language of Financial Jargon?” I told him financial jargon is English or any other language spoken on planet earth but the majority of the human race does not understand the meaning of the words bankers speak. He asked, “Are you talking about financial ratios?” I told him yes, and gave him examples such as current ratioreceivables turnover, net working capital, gross margin, debt coverage, and debt to equity, which are just some of the terms in the language of Financial Jargon.

Sure, Elliott owns a business and survived college where he had taken a finance or accounting course. He even told me he had to memorize all the formulas to earn the grade he received. However, he went on to say, nobody told me I needed to understand the true meaning of these ratios to communicate with an alien known as a Bankers.

Ratios Hold Different Meanings for Bankers

Well, I told him these ratios do have different meanings to your banker than you were taught. Not enough time to teach him the entire language so I just explained one. I said debt to equity ratio could be defined as total debt to shareholders net worth. In college, you were taught this shows how leveraged a company is, in that the lower the ratio, the stronger the company.

To your banker, this ratio tells him who really owns your company; you or your creditors. Bottom line, if this ratio is high, your banker feels they are not talking to the owner of the company and will not loan you any money. So, Elliott, before you try to borrow money again, let’s make sure you are presenting your case in banker’s language.

Instead of using financial jargon around the executive team that doesn’t understand that language, break it down for them. Learn how you can be the best wingman with our free How to be a Wingman guide!

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Accounts Receivable

See Also:
Accounts Receivable Turnover
Collect Accounts Receivable
Calculate Daily Sales Outstanding
Time Saving Tip for Filing Vendor Invoices
Accounts Payable
Notes Receivable
Imprest Account

Accounts Receivable Definition

The accounts receivable definition is a current asset account on the balance sheet. Accounts receivable (A/R) is a mainstay concept in business. It also represents money owed to the company by customers who bought goods or services on credit.

Accounts Receivable Explanation

A proper accounts receivable explanation provides an insight into the everyday operations of the average firm. Basically, the customers already received the goods and services but have not yet paid for them, so the amount equal to the unpaid bill goes into the A/R account. It is considered a short-term asset account because the receivables are expected to be collected within one year or one operating cycle. Money in A/R is essentially an interest-free loan to customers.

Accounts receivable accounting measurements are used in certain financial ratios as a measure to analyze a company’s liquidity. A company with an uncommonly high A/R amount may be having trouble collecting payment from customers. While a strong accounts receivable turnover ratio may indicate operational efficiency in the company.

A company can manage receivable accounts by relaxing or tightening its customer credit standards. Tightening credit standards can shorten the collection period, but it may also discourage purchases. Relaxing credit standards, on the other hand, may stimulate sales, but increase the chance of having late payments or uncollectible accounts. A controller should be on hand for this type of A/R analysis.


Download The A/R Checklist


Accounts Receivable Formula

An accounts receivable formula does not exist as such because A/R are merely purchases, on credit, which have not been paid yet. The rate at which these receivables turnover, however, becomes very important. It is especially important with businesses which must maintain consistent cash flows.

Accounts Receivable Equation for Turnover = Net Sales on Credit / Average Accounts Receivable

Accounts Receivable Example

For example, Cathryn is a starting a business which sells industrial equipment. She has worked in the field for a long time and is considering the option of offering credit sales to her customers.

Cathryn begins her decision making by looking at her competitors. Finding that some do and some do not offer trade credit, she continues.

She then looks at her proforma financials and cash flow statements. She decides that it is not important to sell a product if cash does not come in an expectable pattern.

Cathryn then looks back at the market to evaluate the customer. Would credit make or break her deals? Would this person have any expectations on credit? She looks deeply into the mind of her purchasors and creates a plan.

Cathryn decides to offer credit sales to customers. She will use 2/10 net 30 terms to keep payment cycles short. She is also considering a late payment penalty.

Cathryn is satisfied because rather than offering a basic payment package she is thinking strategically. Cathryn is confident that if she can understand the mind of her customer, then her business will succeed.

If you’re like Cathryn trying to decide how to collect account receivables, then download our free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

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Don’t Let Your Business Lose Money for Too Long!

Over the holidays we were asked by an investor to examine a company and determine if it could survive. We reviewed the financial records and met with management. At the end of our review both we and management agreed that we were about a year too late in saving the company! What difference does a year make?

The Difference of a Year

What was different one year ago? The company had a profitable business surrounded by money losing products and high overhead. Action could have been taken to shed the unprofitable business, reduce expenses and grow the profitable sales. Unfortunately, time had run out!

Don’t Let Your Business Lose Money for Too Long!

One year ago the company had positive working capital and a good relationship with their vendors. Over the past year, they consumed their cash and disappointed their vendors to the point that no one was willing to work with them. The best analogy would be to imagine you are flying an airplane and the engine stops. As the plane plummets toward the earth you don’t wait until 1000 feet over the ground to bring it out of a dive! Same thing with a company!

If you find your company in a dive and losing money you should remember two rules:

Rule #1: Don’t Lose Money!
Rule #2: See Rule #1!

It is imperative to take corrective action early in the crisis. Most entrepreneurs do not want to take one step backward. Unfortunately, it is sometimes necessary in order to survive a recession.

Don’t let your business lose money for too long! If you are seeking more ways to make a big impact in your company, download the free 25 Ways To Improve Cash Flow whitepaper to find other ways to improve your cash flow within 24 hours.

Don't Let Your Business Lose Money for Too Long!

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LEARN THE ART OF THE CFO